Markets exist for the purpose of exchange, allowing participants to achieve higher states of utility or satisfaction by enabling a reallocation of resources. Some markets do this effectively, resulting in a final state where buyers are closely matched with the products they most desire and sellers generate maximum revenues. Large, liquid public stock exchanges often work this way. During each trading session, buyers and sellers are able to effectively exchange stocks at mutually agreed upon price points. Buyers who most value any given stock are generally able to purchase it from sellers who least value the same stock. Following a successful exchange, both parties have achieved their goals and are better off.
The simpler the product being exchanged, the easier it is for this type of ideal product reallocation to occur. Consider markets that contain identical products. These products can be more precisely referred to as fungible; that is, all of the products are completely substitutable. For example, there is no practical difference between one ounce of gold and another ounce of gold. Services can also be fungible. For example, the services of a public notary are generally viewed as substitutable for that of any other public notary.
Markets for fungible products tend to work well due to the certainty about the product being exchanged. Consider the market for gold. The owner of a gold mine does not need to consider the price of each ounce of gold they sell. Likewise, a jewelry manufacturer in the market for gold does not need to decide which mine each individual ounce of gold comes from. The value and price of gold are set by the marketplace itself and is known by all participants. This simplicity makes it easy for buyers and sellers to transact.
In contrast to markets for fungible products, markets for complex products may result in product allocations that are far from optimal. In such a market, it may be difficult for buyers and sellers to effectively communicate the variety of differences associated with each individual product, and, as a result, buyers may be challenged to find and purchase their preferred product. Some buyers may settle for inferior, but acceptable, products. As a result, sellers will earn less revenue than they otherwise would have. Buyers may also leave the marketplace entirely, resulting in a poor outcome for all parties. These sub-optimal results rarely occur in fungible markets but are commonplace in complex markets.
One type of complex marketplace is the market for semi-fungible products. Semi-fungible products are goods or services that are somewhat interchangeable but not precisely alike. An example of a semi-fungible market is the market for personal transportation. While all tickets for a seat on an airplane between Washington D.C. and New York may provide the same basic product; namely, transportation between the two cities, the value of a first class ticket may be many times that of a coach ticket. Extending our market definition beyond air transportation, the price of a bus ticket between these two cities may be only a small fraction of the cost of our coach plane seat despite the fact that the same basic service is still being provided. In this type of market, participants frequently may have difficulty identifying and obtaining the product they most desire, resulting in a sub-optimal allocation of products.
If the participants of a complex market are sufficiently dissatisfied with the initial product allocation, a secondary market may be created. These markets may be organized, or may be spontaneous and informal. In either case, the goal of a secondary market is to identify product reallocation opportunities that were not achieved by the primary market.
While secondary markets address sub-optimal product allocation, they often face the same challenges as primary markets, and there may be additional challenges that further limit their effectiveness. In some cases, industry-specific technology or governmental regulation require the creation of a formalized market infrastructure. This is the case with air transportation, lodging, and financial instruments. In other cases, secondary markets are easily imbalanced by supply and demand dynamics. A scalper with too many tickets to sell prior to the start of an event is unlikely to spend any significant time buying additional tickets, even if the pricing were extremely favorable.
Secondary markets may also be inefficient with respect to buyers who wish to exchange their product for one that they find more attractive. To accomplish this, a buyer may often need to participate in two distinct transactions. They must sell the product they originally purchased in the primary market and then buy a product they prefer in the secondary market. This two-step process introduces an additional risk: if a buyer is unable to complete one of the two transactions, they may find themselves with two products instead of one, or with no products at all.
The prior art identifies a number of inefficiencies that exist in markets for semi-fungible products. Previous attempts at improving these markets can be grouped into three categories:
1. The enhancement of existing markets through technology
2. The introduction of new secondary markets
3. The introduction of new primary markets
The first category of prior art enhances existing markets by introducing new technology to improve efficiency, speed, and cost. U.S. Pat. No. 6,574,608 to Dahod et al. describes a buyer-driven system of commerce. It improves historical buyer-driven processes such as newspaper want ads by leveraging the efficiency of electronic platforms. However, this approach does not provide for the direct exchange of products between two market participants. U.S. Pat. No. 7,447,655 to Brumfield et al. introduces a methodology for automated short term electronic trading. Brumfield's concept may increase the potential speed at which participants may engage in trading, but also remains constrained by market transactions which involve only buying or selling a given object. While this first category of prior art may serve to increase market efficiency, it does not directly address the need for a new approach that allows for mutually beneficial product exchanges.
The second category of prior art introduces new secondary markets that seek to improve upon historical methods. U.S. Pat. No. 8,046,247 to Walker et al. describe a method by which sellers can reclaim and resell their products when demand increases. This approach may increase seller profits, but requires that buyers give up their original right to the purchased product. U.S. Pat. No. 6,067,532 to Gebb describes a method by which purchased products that are no longer desired can be offered up for resale. This approach may create additional value for the buyer who regrets their purchase, but does not address buyers who do not wish to relinquish ownership of their purchased product. U.S. Pat. No. 7,680,726 to Himmelstein describes a method for bartering securities electronically via the creation of potentially tax-advantaged “Himmelstein Options”. This approach may allow for the barter of various financial securities, but does not address the requirements or approach required for the exchange of non-financial semi-fungible products.
The third category of prior art attempts to improve upon the primary market mechanism. U.S. Pat. No. 7,769,673 to Brett proposes an auction-driven system that generate selling prices theoretically closer to the true market value of each product being sold, thus improving upon the sub-optimal allocation common in complex markets. U.S. Pat. No. 7,908,207 to Boyle et al. allows for the aggregation of demand in a reverse auction market, thereby improving the expected outcomes for participating buyers.
This third category of prior art may improve the functioning of complex primary markets, but, by definition, all post-primary market dynamics are outside the scope of these techniques. Over time, the preferences of market participants may shift and new participants may enter the market. What might be an optimal outcome for a primary market at one point in time may be an extremely poor outcome a short time thereafter. The more dynamic a market, the more value a secondary market may offer. In order to achieve the best possible final result, a continuous reallocation methodology that utilizes a secondary market is required.